Suharnan v Brookfields
[2013] NZHC 191
•13 February 2013
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
CIV-2011-404-5830 [2013] NZHC 191
BETWEEN SIVASUNDARAM SUHARNAN First Plaintiff
ANDSUVIKEN LIMITED (IN LIQUIDATION) Second Plaintiff
ANDBROOKFIELDS First Defendant
ANDKENNETH MARTIN JOHNSTON Second Defendant
Hearing: 4 February 2013
Counsel: KA van Houtte for first defendant
TA Chubb for first plaintiff
Judgment: 13 February 2013
JUDGMENT OF ASSOCIATE JUDGE FAIRE
[on applications to strike out and for summary judgment]
This judgment was delivered by me on 13 February 2013 at 4:30pm, pursuant to Rule 11.5 of the High Court Rules.
Registrar/Deputy Registrar
Date……………
Solicitors: Foley & Hughes, PO Box 6829, Auckland
Kennedys, PO Box 3158, Auckland 1140
SUHARNAN V BROOKFIELDS HC AK CIV-2011-404-5830 [13 February 2013]
CONTENTS
The applications ....................................................................................................... 3
The pleadings ........................................................................................................... 3
Background .............................................................................................................. 4
The principal grounds advanced in support of both substantive parts of the application ................................................................................................................ 7
The court’s approach to a strike out application ...................................................... 8
The court’s approach to a summary judgment application by a defendant .............. 9
The opposition........................................................................................................ 10
Analysis of the substantive grounds........................................................................11
Conclusions ............................................................................................................ 20
Costs ....................................................................................................................... 21
Further steps in this proceeding ............................................................................. 21
The applications
[1] The first defendant applies for orders:
(a) Striking out the claim against the first defendant;
(b) Leave to apply for summary judgment against the first plaintiff; and
(c) For summary judgment against the first plaintiff.
[2] A number of preliminary matters relating to the application were resolved and were the subject of my minutes of 3 and 17 December 2012 and therefore require no further comment. I proceed on the basis set out in those minutes.
The pleadings
[3] The first plaintiff pleads that he is a director and 50 per cent shareholder of the second plaintiff.
[4] The second plaintiff is a company incorporated on 28 July 2005 under the
Companies Act 1993. It was put into liquidation by the High Court on 30 January
2009. Gerald Rea and Paul Sargison were appointed its liquidators.
[5] The first defendant is a firm of barristers and solicitors. The first defendant, it is alleged, was instructed by the second plaintiff regarding the purchase of a property and the execution and registration of a mortgage to the ASB Bank Ltd in August 2005. Two causes of action are pleaded against the second defendant. They are respectively the second and third causes of action in the statement of claim. They are not directly affected by the application that I now consider.
[6] In the second cause of action the first plaintiff pleads against the second defendant that it breached an oral agreement that the first plaintiff and the second defendant made relating to an investment in a property.
[7] In the third cause of action, the second plaintiff pleads that it lent money to the second defendant of which it now seeks the return.
[8] The first cause of action, which is the subject of the application for strike out and summary judgment, states that the first defendant owed a duty of care to the first plaintiff. It is pleaded that the duty of care arises by virtue of the fact that the first defendant agreed to undertake instructions from the second plaintiff relating to the execution and registration of a mortgage in favour of ASB Bank Ltd. It pleads that a solicitor employed by the first defendant arranged and witnessed the execution of the mortgage in favour of ASB Bank Ltd, and registered the mortgage with Land Information New Zealand.
[9] It next pleads that the first defendant was negligent in carrying out those tasks because:
(a) It did not advise the directors of the second plaintiff that the mortgage constituted a major transaction in accordance with s 129 of the Companies Act 1993, and therefore required approval by special resolution; and
(b)That it failed to ensure that the mortgage was properly executed by failing to ensure that the requirements of the Land Transfer Act 1952, the Land Transfer Regulations 2002 and the Companies Act 1993 were met.
[10] It pleads that, as a result of the alleged negligence the first plaintiff has suffered loss and damage in the sum of $230,000 plus interest.
Background
[11] The second plaintiff was incorporated on 28 July 2005. The Companies Register records that the second defendant is a 50 per cent shareholder and the first plaintiff held the remaining 50 per cent of the shareholding. The first plaintiff and the second defendant are directors of the second plaintiff.
[12] The first plaintiff and the second defendant are brothers-in-law. [13] The second plaintiff does not have a constitution.
[14] The first plaintiff says that he and the second defendant agreed to use the second plaintiff to purchase a property at 62 Grand Drive, Orewa. The second defendant had already entered into an agreement for sale and purchase of this property for $660,000. The first plaintiff says that he and the second defendant agreed that each would contribute half of the purchase price.
[15] On 11 August 2005, the first plaintiff paid $82,000 to the second defendant. On 9 September 2005, the second defendant instructed the first defendant in respect of the property purchase. Those instructions were relatively urgent, as settlement of the purchase was due to take place on 19 September 2005. The second defendant had not previously been a client of the first defendant. The second defendant advised the first defendant that he intended to nominate a company, namely the second plaintiff, to complete the purchase of the property. The first defendant duly prepared a nomination agreement.
[16] The second defendant instructed the first defendant that the purchase price was to be met by an advance of $247,000 from the first plaintiff. The remaining
$400,000 was to be obtained from the ASB Bank Ltd, secured by a first mortgage over the property, and personally guaranteed by the second defendant. On
16 September 2005, the first plaintiff transferred $247,000 to the first defendant’s
trust account.
[17] The mortgage was a major transaction for the second plaintiff and therefore required a special shareholder resolution pursuant to s 129 of the Companies Act
1993. There is a dispute in the papers as to precisely what the first defendant was advised concerning the status of the directors and shareholders at the time the mortgage was raised. For the purposes of this strike out application, I proceed on the basis that the first defendant had not been given any specific information regarding a change in shareholding and directorship of the second plaintiff company at the time
the mortgage was signed by the second defendant only as a director of the second plaintiff.
[18] The documents that were signed are the following:
(a) A solicitor’s certificate to ASB Bank Ltd executed by the first defendant and confirming compliance with the Bank’s instructions relating to the execution and registration of the loan documents;
(b)A director’s certificate signed by the second defendant confirming broad approval to enter into the transaction, confirming that the board acted in compliance with its duties at law and within its powers, and that the transaction was validly entered into by the company. It was signed by the second defendant as director. It was prepared by the first defendant;
(c) A director’s resolution confirming a special resolution approving entry into the documents by the company. It was signed by the second defendant. It was prepared by the first defendant;
(d)A special shareholder resolution approving the transaction and acknowledging that it was a major transaction for the purposes of s 129 of the Companies Act 1993. This resolution was signed by the second defendant. It was prepared by the first defendant; and
(e) The land transfer mortgage that was signed by the second defendant.
It was witnessed by the employee solicitor of the first defendant. It was certified “correct for the purposes of the Land Transfer Act 1952” by the employee solicitor of the first defendant.
[19] The funds from the bank were uplifted and settlement of the purchase occurred on 23 September 2005. The first defendant then issued its final invoice to the second plaintiff, which was addressed care of the second defendant.
[20] In November 2006 the second defendant advised the first defendant that his relationship with the first plaintiff had gone sour.
[21] The first plaintiff then applied to liquidate the second plaintiff. The second defendant, in the first instance, instructed the first defendant to act for him to defend the liquidation proceedings. The first defendant terminated those instructions because it claimed that the second defendant had altered documents on the first defendant’s letterhead before sending them to the first plaintiff.
[22] As already recorded, the second plaintiff was placed into liquidation on
30 January 2009.
[23] Counsel advised me from the bar that the liquidators arranged a sale of the property which was the purpose of the first plaintiff and second defendant taking a shareholding and directorship in the second plaintiff.
[24] The first plaintiff pleads that he has received $100,000 in the liquidation of the company as a partial repayment of his unsecured loan to it. He claims damages of $230,000.
The principal grounds advanced in support of both substantive parts of the application
[25] The first plaintiff ’s claim against the first defendant requires the court to find that the first defendant owed the first plaintiff a duty of care in his capacity as a director and/or shareholder, and that it breached that duty by not advising the first plaintiff that, as the mortgage constituted a major transaction in terms of s 129 of the Companies Act 1993, the company was required to obtain approval for the transaction through a special resolution. In addition, the first defendant failed to ensure that the mortgage instrument was properly executed in accordance with the requirements of the Land Transfer Act 1952, the Land Transfer Regulations 2002 and the Companies Act 1993.
[26] The first defendant’s principal ground in support of strike out is that there is
currently no authority for the proposition that a solicitor acting for a company owes a
duty of care to the shareholders of that company. Further, counsel submitted that it was not just and reasonable in all the circumstances that a duty of care should be recognised. In addition, counsel submitted that policy reasons do not support the imposition of a duty of care in the circumstances.
[27] The first defendant’s case alleges that the cause of action pleaded against it cannot succeed. That would justify the striking out of the cause of action. As it is the only cause of action the circumstances would also justify the entry of summary judgment in favour of the first defendant.
The court’s approach to a strike out application
[28] The general principles to be applied in a strike out application are well known. They were confirmed in Attorney-General v Prince and Gardner where the Court of Appeal said:1
A striking-out application proceeds on the assumption that the facts pleaded in the statement of claim are true. That is so even although they are not or may not be admitted. It is well settled that before the Court may strike out proceedings the causes of action must be so clearly untenable that they cannot possibly succeed (R Lucas & Son (Nelson Mail) Ltd v O’Brien [1978]
2 NZLR 289 at pp 294-295; Takaro Properties Ltd (in receivership) v
Rowling [1978] 2 NZLR 314 at pp 316-317); the jurisdiction is one to be exercised sparingly, and only in a clear case where the Court is satisfied it has the requisite material (Gartside v Sheffield, Young & Ellis [1983] NZLR
37 at p 45; Electricity Corporation Ltd v Geotherm Energy Ltd [1992] 2
NZLR 641); but the fact that applications to strike out raise difficult questions of law, and require extensive argument does not exclude
jurisdiction (Gartside v Sheffield, Young & Ellis).
[29] The principles referred to above were endorsed by the Supreme Court in
Couch v Attorney-General.2
[30] The court can have regard to evidence put forward either in opposition or support of the application provided it does not contradict that which is pleaded in the
statement of claim.3
1 Attorney-General v Prince and Gardner [1998] 1 NZLR 262 (CA) at 267.
2 Couch v Attorney-General [2008] NZSC 45, [2008] 3 NZLR 725. See also Body Corporate
207624 v North Shore City Council [2012] NZSC 83 at [4].
3 Attorney-General v McVeagh [1995] 1 NZLR 558 (CA) at 566.
The court’s approach to a summary judgment application by a defendant
[31] Rule 12.2(2) of the High Court Rules requires that the defendant satisfy the court that none of the causes of action in the plaintiff’s statement of claim can succeed.
[32] In Westpac Banking Corp v MM Kembla New Zealand Ltd, the Chief Justice noted the following when dealing with r 136(2), the predecessor of r 12.2(2):4
[58] The applications for summary judgment were made under R 136(2) of the High Court Rules which permits the Court to give judgment against the plaintiff “if the defendant satisfies the Court that none of the causes of action in the plaintiff’s statement of claim can succeed”.
[59] Since R 136(2) permits summary judgment only where a defendant satisfies the Court that the plaintiff cannot succeed on any of its causes of action, the procedure is not directly equivalent to the plaintiff’s summary judgment provided by R 136(1).
[60] Where a claim is untenable on the pleadings as a matter of law, it will not usually be necessary to have recourse to the summary judgment procedure because a defendant can apply to strike out the claim under R 186. Rather R 136(2) permits a defendant who has a clear answer to the plaintiff which cannot be contradicted to put up the evidence which constitutes the answer so that the proceedings can be summarily dismissed. The difference between an application to strike out the claim and summary judgment is that strike-out is usually determined on the pleadings alone whereas summary judgment requires evidence. Summary judgment is a judgment between the parties on the dispute which operates as issue estoppel, whereas if a pleading is struck out as untenable as a matter of law the plaintiff is not precluded from bringing a further properly constituted claim.
[61] The defendant has the onus of proving on the balance of probabilities that the plaintiff cannot succeed. Usually summary judgment for a defendant will arise where the defendant can offer evidence which is a complete defence to the plaintiff’s claim. Examples, cited in McGechan on Procedure at HR 136.09A, are where the wrong party has proceeded or where the claim is clearly met by qualified privilege.
[62] Application for summary judgment will be inappropriate where there are disputed issues of material fact or where material facts need to be ascertained by the Court and cannot confidently be concluded from affidavits. It may also be inappropriate where ultimate determination turns on a judgment only able to be properly arrived at after a full
4 Westpac Banking Corp v MM Kembla New Zealand Ltd [2001] 2 NZLR 298 (CA).
hearing of the evidence. Summary judgment is suitable for cases where abbreviated procedure and affidavit evidence will sufficiently expose the facts and the legal issues. Although a legal point may be as well decided on summary judgment application as at trial if sufficiently clear (Pemberton v Chappell [1987] 1 NZLR 1), novel or developing points of law may require the context provided by trial to provide the Court with sufficient perspective.
[63] Except in clear cases, such as a claim upon a simple debt where it is reasonable to expect proof to be immediately available, it will not be appropriate to decide by summary procedure the sufficiency of the proof of the plaintiff’s claim. That would permit a defendant, perhaps more in possession of the facts than the plaintiff (as is not uncommon where a plaintiff is the victim of deceit), to force on the plaintiff’s case prematurely before completion of discovery or other interlocutory steps and before the plaintiff’s evidence can reasonably be assembled.
[64] The defendant bears the onus of satisfying the Court that none of the claims can succeed. It is not necessary for the plaintiff to put up evidence at all although, if the defendant supplies evidence which would satisfy the Court that the claim cannot succeed, a plaintiff will usually have to respond with credible evidence of its own. Even then it is perhaps unhelpful to describe the effect as one where an onus is transferred. At the end of the day, the Court must be satisfied that none of the claims can succeed. It is not enough that they are shown to have weaknesses. The assessment made by the Court on interlocutory application is not one to be arrived at on a fine balance of the available evidence, such as is appropriate at trial.
[33] These passages were approved by the Privy Council in Jones v Attorney- General.5
The opposition
[34] The first plaintiff opposes the application for leave to bring a summary judgment application and points out that the application is well out of time. I will leave that part of the application to one side for the moment as the important aspect of this case is the substance of the summary judgment and strike out applications.
[35] The grounds supporting the opposition of both the strike out application and the summary judgment application are essentially the same and are as follows:
(a) There is a reasonably arguable cause of action against the first defendant;
(b)The first plaintiff ’s claim against the first defendant is a novel claim and as such the court’s should be slow to strike it out;
(c) There was, at the material time, close proximity between the first plaintiff and the first defendant;
(d)It was reasonably foreseeable that the first plaintiff would suffer loss if the first defendant was negligent in carrying out its duties;
(e) In certain circumstances, solicitors have been found to owe a duty of care to persons other than their clients;
(f) There are sound policy reasons for the imposition of a duty of care, including the legislative framework and the promotion of professional competence; and
(g)It is just and reasonable that a duty of care should be recognised in this particular situation.
Analysis of the substantive grounds
[36] Counsel were agreed as to the test for deciding whether or not a duty of care should be recognised in a novel situation.
[37] The court asks whether it is just and reasonable in all the circumstances for a duty to be imposed.6
[38] Two broad fields of inquiry are required. The first is the degree of proximity or relationship between the parties. The second is whether there are other, wider
policy considerations that tend to negative or restrict or strengthen the existence of a duty of care in a particular case.7
[39] Ms van Houtte correctly summarised the inquiry into proximity. She submitted that it is concerned with the nature of the relationship between the parties and is more than a simple question of foreseeability. She then correctly summarised the statement of principle in Rolls-Royce New Zealand Ltd v Carter Holt Harvey Ltd.8 She submitted that:
It involves consideration of:
1.The degree of analogy with cases in which duties are already established;
2.The nexus between the defendant’ alleged negligence and the plaintiff’s loss;
3. The burden to the defendant of taking precautions against the risk;
and
4.Whether the consequences to the defendant may be out of proportion to its fault.
[40] To that summary should be added the extent to which those in the first plaintiff’s position are vulnerable, and whether there are, or realistically have been, other remedies for a plaintiff.9 In addition, the court may take into account the statutory and contractual background. That can have relevance not only in relation to proximity but also in relation to the wider policy issues involved.10
[41] I first consider, therefore, the question of whether duties have been imposed in analogous situations.
[42] Ms Chubb properly acknowledged that there was no contract between the first plaintiff and the first defendant. The first plaintiff was not a client of the first defendant. The first plaintiff did not engage the first defendant to advise him in
respect of the investment in the property that was to be purchased by the company.
7 Rolls-Royce New Zealand Ltd v Carter Holt Harvey Ltd [2005] 1 NZLR 324 (CA) at 58.
8 At [58].
9 At [61] and [62].
10 At [64].
[43] Ms van Houtte submitted that there was no relationship between the first plaintiff and the first defendant that could give rise to a personal duty that was separate from the first defendant’s duty to the company, the second plaintiff. She referred to a number of authorities, some of which I will analyse shortly.11
[44] The inquiry would not be complete, however, if one did not have regard to the two main types of cases where such duties have been found to be owed by solicitors. Ms Chubb drew attention to the disappointed legatee cases and the certificate cases.12
[45] I adopt the summary of the cases made by Randerson J in Radisich v
Templeton.13
[19] Both counsel accepted that it is well established that a lawyer’s duty generally is owed to his or her client alone. As Cooke J stated in Allied Finance and Investments Ltd v Haddow & Co [1983] NZLR
22, 24 (CA):
... the relationship between two solicitors acting for their respective clients does not normally of itself impose a duty of care on one solicitor to the client of the other. Normally the relationship is not sufficiently proximate. Each solicitor is entitled to expect that the other party will look to his own solicitor for advice and protection.
[20] The principal rationale for this proposition is that the fiduciary nature of the solicitor/client relationship requires the solicitor to act with undivided loyalty in the client’s best interests. As a general rule, there is no assumption of responsibility by a solicitor to the opposite party to a transaction who is represented by his or her own legal adviser.
[21] This rationale was confirmed by the Court of Appeal in Brownie Wills v Shrimpton [1998] 2 NZLR 320 in which it was held that a solicitor did not owe a duty of care to a non-client director of a client company to advise on the implications of signing a guarantee for a loan to a company. Gault and Blanchard JJ held at 324 that liability for negligent advice (or the absence of it) is founded on an assumption of responsibility which in turn depends on establishing a relationship of proximity. The plaintiff must be able to show that it was reasonably foreseeable in the circumstances that the plaintiff
11 Takaro Properties Ltd v Rowling [1986] 1 NZLR 22 (CA); Christensen v Peat Marwick [1994] 3
NZLR 745 (HC); Christensen v Scott [1996] 1 NZLR 273 (CA); Brownie Wills v Shrimpton
[1998] 2 NZLR 320 (CA).
12 Gartside v Sheffield Young & Ellis [1983] NZLR 37 (CA); Connell v Odlum [1993] 2 NZLR
527 (CA).
13 Radisich v Templeton [2009] 3 NZLR 276 (HC) at 281.
would rely on the defendant in the way and to the extent he did. And, as Tipping J put it at 328:
...liability in tort for negligent omissions only arises, at least in general terms, where the person concerned has assumed a responsibility to act. That responsibility must be assumed to the plaintiff. The fact that responsibility has been assumed in favour of some other party, such as the solicitor’s client, is of no moment in itself.
[22] As Mr Harris accepted on behalf of the second defendant, there are some recognised exceptions to the general principle. First, there are the “certificate cases” such as Allied Finance and Connell v Odlum [1993] 2 NZLR 257, 264 (CA). The second category of exceptions are the “disappointed legatee” cases such as Gartside v Sheffield, Young & Ellis [1983] NZLR 37, 42 (CA) and White v Jones [1995] 2
AC 207, 259-260.
[23] There are also other limited exceptions to the general rule included in the following helpful summary provided by Venning J in Todd & Ors v Hillary & Ors HC AK CIV 2005-412-294 15 June 2007 at [112]:
The cases in the United Kingdom and New Zealand where a solicitor has been held to owe a duty to a party other than his client are relatively limited as were noted by the Court of Appeal in Connolly-Martin v Davis. The examples given are of:
The imposition of an obligation where the court orders a solicitor who has carriage of an order of the court and fails to comply with the duty (imposed by a rule of court) to lodge a request for the investment of money in court at the Chancery pay office to compensate for loss: Batten v Wedgewood Coal and Iron Company (1886) 31
Ch D 346.
A solicitor who undertakes to hold his client’s passport to the order of the court in the context of a court order permitting his client access to children on his undertaking he would surrender his passport to a solicitor becomes an independent custodian of the passport and assumes obligations towards the opposing party: Al-Kandari v JR Brown [[1988] QB 665].
A prosecuting solicitor who voluntarily assumes a responsibility to inform a Magistrates’ Court that offences committed by a defendant have been taken into consideration by the Crown Court when sentencing that defendant owes a duty of care to the defendant to discharge that responsibility: Welsh v Chief Constable of the Merseyside Police [1993] 1 All ER 692.
The duty on a solicitor given instructions for the drawing of a will for execution may extend to an intended beneficiary: White v Jones [1995] 2 AC 207.
A solicitor providing a certificate to a moneylending company that an instrument by way of security over his client is fully binding on his client and there are no other charges assumes a responsibility to the moneylender when giving such a certificate: Allied Finance and Investments Ltd v Haddow & Co [1983] NZLR 22 (CA).
A solicitor who signs a certificate for the purpose of giving validity to an agreement contracting out of the provisions of the Matrimonial Property Act owes a duty of care to the other party to the agreement when signing the certificate as no conflict of interest could arise. The other party is within the solicitor’s contemplation and could reasonably rely on and act upon the assurance the certificate conveyed: Connell v Odlum [1993] 2 NZLR
257 (CA).
[46] The following points emerge when one considers the authorities and the facts that I am entitled to rely upon for the purposes of this application:
(a) When the first defendant arranged for the registration of the mortgage without a proper shareholder’s resolution and without the instrument being properly executed, the first plaintiff lost the protection that was given by s 129 of the Companies Act 1993 and the Land Transfer Act itself. He lost the opportunity to obtain knowledge about the mortgage that was registered and with that, the opportunity to object or to decline to invest in the company;
(b)The first defendant knew of the first plaintiff’s investment in the company. It is fair to say that his position was outside the principle cited in Takaro Properties Ltd v Rowling.14 The first plaintiff clearly was someone who had an interest more than being a person interested in the company itself;
(c) The evidence discloses that the first defendant did not ensure that the mortgage instrument was properly executed. Section 101 of the Land
Transfer Act 1952 provides that the registered proprietor of the
14 Takaro, above, n 11.
property, in this case the company, must execute the instruments. Section 157 of the Land Transfer Act 1952 provides for the Land Transfer Rules to prescribe the manner in which instruments, including mortgages, must be executed, witnessed and attested. It also provides that every instrument executed in accordance with that section has the same effect as a deed executed by the parties signing it. Regulation 16 of the Land Transfer Regulations 2002 provides that a person required to execute a paper instrument for the purposes of registration under the Land Transfer Act must be regarded as having complied with that requirement if the instrument is executed in accordance with any other enactment that prescribes a method of execution. In this case the company had two directors. It did not have a constitution. Section 180(1)(a) of the Companies Act 1993 required that the document be signed by both directors in order to be validly executed. The first plaintiff, however, did not sign the document. Despite that defect, the solicitor employee of the first defendant witnessed the second defendant’s signature and certified the document as correct for the purposes of the Land Transfer Act. He then went ahead and registered it. The solicitors did not invite the first plaintiff to sign the documents as was required by the law. Whilst I have had not had a detailed analysis of the loss, it seems that, on the face of it, the first plaintiff lost, at the very least, an ability to have his advance rank in equal priority to that of the Bank’s. More importantly, as Ms Chubb submitted, the first plaintiff, by being denied the opportunity of taking part in the shareholders’ resolution and the execution of the documents, lost the opportunity to object to the mortgage and to find an alternative investment. All of this occurred when the first defendant knew that the first plaintiff was investing money in the company;
(d)The decision in Christensen v Peat Markwick is distinguishable as the plaintiffs in that case were arguing qua-shareholders for compensation for loss of value in the shares of the company and not for compensation for losses stemming from the provision of a personal
loan to the company.15 As Ms Chubb submitted, it is arguable that the company has not suffered any loss through the registration of the mortgage without the proper authorities behind it. The company after all was borrowing money either from the bank or as intended from both shareholders;
(e) I next consider the nexus between the defendants’ alleged negligence and the plaintiffs’ loss. When the first defendant failed to ensure that the protections put in place by the Companies Act 1993 were followed, ie the requirement of a resolution of 75 per cent of the shareholders to authorise a major transaction, such as mortgage in this case, one can see that there is here a sufficient nexus between the parties and the loss suffered by the first plaintiff.
(f) When one considers the question of burden and risk, it is readily apparent that by witnessing and certifying that the mortgage instrument was correct for the structures of the Land Transfer Act
1952, the first defendant had assumed the responsibility of ensuring that the mortgage had been validly executed. There is no extra burden placed on the first defendant arising from the duty of care that is argued for the plaintiffs. Ms Chubb drew attention to the fact that such a risk is a business risk that the defendant already carries insurance to protect: a comment made by Richardson J in Gartside v
Sheffield Young & Ellis.16
(g)I next consider the vulnerability of the plaintiffs. I do not accept that any step could have been taken by the plaintiffs in these circumstances that would have prevented either priority or security being accorded to the ASB Bank Ltd by the registration of the mortgage occurring. That is because once the steps that were taken by the first defendant in preparing and executing the documents, the bank
gained a registered mortgage without the knowledge or consent of the
15 Christensen, above n 11.
16 Gartside, above n 12.
first plaintiff. Ms Chubb drew attention to the fact that the consequence of registering the mortgage instrument is that the mortgagee obtained an indefeasible title. That is one reason why the certification process was so important. The certification ensures that documents are validly executed prior to the consequence of indefeasibility of title being granted to the other party. There are but limited ways to defeat indefeasibility of title. The result is that without the necessary consents there are few remedies available to a plaintiff in the first plaintiff’s situation in this case.
(h)I consider the statutory background. The Companies Act 1993, as I have mentioned, provides two relevant provisions to protect shareholders from acts that are not authorised. The first is when the transaction concerned is a major transaction. Section 129 of the Companies Act 1993 requires that a major transaction be approved by a 75 per cent majority of the shareholders. The mortgage was such a transaction. Approval did not occur in this case. The second protection is that companies with two directors but without constitutions are required to execute the documents, for example the mortgage, by having the two directors sign the documents by virtue of s 180 of the Companies Act 1993. Once again, this did not occur in this case. Regulation 16(1)(c) of the Land Transfer Act Regulations
2002 requires that a paper instrument, such as the mortgage in question, be executed in accordance with any other enactment (such as the Companies Act) that prescribes a method of execution. The mortgage instrument required that the execution of the document be witnessed, and that the document be verified as correct for the purposes of the Land Transfer Act 1952. These acts were undertaken by the employee solicitor of the first defendant. They are an assurance to the Registrar of Lands that the instrument was validly executed. That is important because the consequence of registration of the mortgage instrument is that it gives the mortgagee an
indefeasible title.17 I accept Ms Chubb’s submission that in light of the legislative background it is not unreasonable to expect a solicitor to foresee the consequences of his carelessness in witnessing and certifying as correct an instrument to be registered under the Land Transfer Act both in breach of that Act and in breach of provisions of the Companies Act, for the persons to whom the protections apply.
[47] Before leaving the analysis, one should further record that the decision in Brownie Wills v Shrimpton is again distinguishable because that was a failure to advise in a case that required an assumption of responsibility.18 When I analyse the judgments of the majority I see nothing inconsistent with the finding of a duty of care based on the facts that I must assume are correct for the purposes of this strike out and summary judgment application.
[48] I now consider the second stage of the inquiry and whether there are other wider policy considerations that might negate or restrict or strengthen the existence of a duty.
[49] The legislative background is a factor that is relative to both the proximity and the policy inquiries. As I have already concluded, the legislative background strengthens the existence of a duty in this case.
[50] The imposition of a duty in this case does not impose any further obligation on a solicitor than is already imposed on the solicitor when he or she undertakes work of this nature. In short, the duty simply reinforces the obligation of the solicitor to ensure that they take reasonable care when witnessing and certifying documents as correct. The imposition of a duty promotes professional competence in undertaking such important work as registering documents under the Land
Transfer Act.19
17 Frazer v Walker [1967] NZLR 1969.
18 Brownie Wills, above n 11.
19 Connell v Odlum, above n 11, at 271.
[51] Ms Chubb drew my attention, quite correctly, to the following statement of principle by Thomas J in Connell v Odlum which, in my view, is applicable to this case:20
Cooke J said in Gartside v Sheffield, Young & Ellis at p 43, that “to deny an effective remedy in a plain case would seem to imply a refusal to acknowledge the solicitor's professional role in the community”. Although speaking there of the fact that in practice the public relies on solicitors (or statutory officers with similar functions) to prepare effective wills, the observation can be comfortably converted to the present context. The certificate in issue is not merely a certificate volunteered by one solicitor to another but a statutory requirement having a defined function in the scheme of the section.
[52] Ms Chubb correctly submitted that such a duty does not open any floodgates argument. The duty in this case is in relation to the witnessing and certifying of documents as correct under the Land Transfer Act in a situation where they were not. The necessary formalities of the shareholders’ resolution authorising the mortgage and the execution of the mortgage itself were not completed in compliance with the Companies Act and, for that matter, the Land Transfer Act. The first defendant’s employee solicitor should not have witnessed the signature of the second defendant. He should not have certified the mortgage instrument as correct for the purposes of the Land Transfer Act 1952.
[53] Section 129 of the Companies Act 1993 is a provision designed to protect shareholders where companies enter into major transactions. These protections are there to protect shareholders from improper actions by directors before they are undertaken.
Conclusions
[54] Before I can be satisfied that this claim should be struck out and that summary judgment is entered, the first defendant must satisfy the test referred to in paragraph 28 that the cause of action is so clearly untenable that it cannot possibly
succeed.
20 Ibid.
[55] I conclude that I am not justified in striking out the cause of action of the first plaintiff against the first defendant. It follows from that that the entry of summary judgment in favour of the first defendant is not justified.
[56] My conclusion makes it unnecessary for me to determine the question of whether leave to apply for summary judgment was justified in this case. Had my conclusion differed from the one that I have made I would have granted leave.
[57] The defendants’ application is accordingly dismissed.
Costs
[58] At counsel’s request I reserve costs so that counsel could discuss the matter. In the event that there is no agreement on the issue, memoranda in support, opposition and reply shall be filed at seven-day intervals. On receipt of the reply memorandum, the file shall be referred to me to conclude the question of costs.
Further steps in this proceeding
[59] The Case Officer who has responsibility for this file shall schedule a telephone case management conference with counsel and advise counsel of the time and date for same. Counsel shall file and serve memoranda dealing with the matters
set out in Schedule 5 to the High Court Rules four working days before the
conference.
JA Faire
Associate Judge